Ufa#Ed 2#Sol#Chap 05

CHAPTER 5 SUGGESTED SOLUTIONS
SOLUTION TO MULTIPLE CHOICE QUESTIONS
5.1 (a) 5.6 (d) 5.11 (b)

5.2 (d) 5.7 (b) 5.12 (c)
5.3 (e) 5.8 (c) 5.13 (b)
5.4 (b) 5.9 (b) 5.14 (d)
5.5 (c) 5.10 (e) 5.15 (e)
END OF CHAPTER QUESTIONS
5.1
An Act of Parliament called the Companies Act, which was introduced in 1973, governs reporting by
management to the shareholders. One of its major objectives is to ensure that company directors do
not withhold information which shareholders are entitled to know. The first reference in this Act to
generally accepted accounting practice is made when it states that ‘the annual financial statements of
a company shall, in conformity with generally accepted accounting practice, fairly present the state of
affairs of the company and its business as at the end of the financial year concerned and the profit or
loss of the company for that financial year’.
When this legislation was tabled in Parliament, accountants in South Africa were faced with the
question: ‘What is generally accepted accounting practice?’ As there was no easy answer to the
question, the South African Institute of Chartered Accountants (SAICA) started working on defining the
term ‘generally accepted accounting practice’. The result is that a number of ‘statements of generally
accepted accounting practice’ have been published, which assist accountants when preparing
financial statements of companies. The SAICA will continue to produce more statements as new
problems in financial reporting are identified. Examples of the topics that have required attention,
include how to report on Non Current assets, how to report sales of inventory and how to report on
investments. Each has resulted in a statement of generally accepted accounting practice, usually
referred to as a GAAP statement.
When the need for a specific standard relating to financial reporting is identified by the APC
(Accounting Practices Committee, which is a committee of the South African Institute of Chartered
Accountants), an exposure draft or discussion paper is circulated to all interested partners for
comment. When consensus is reached, the proposed standard is submitted to the APB (Accounting
Practices Board) for acceptance. The APB is a board with representation from the Public Accountants'
and Auditors' Board, the JSE, Die Afrikaanse Handelsinstituut, the Chamber of Mines, the Association
of Chambers of Commerce, the Federated Chambers of Industries and the Steel and Industry
Federation. Its basic objective is to establish and procure recognition and acceptance of what the
Board considers is or should be generally accepted accounting practice. Once the APB has accepted
the proposed standard, it attains the status of generally accepted accounting practice.
5.2
The auditors of financial statements are required to state that it their opinion, financial statements
“fairly present” the financial performance and the financial position of the company in accordance with
generally accepted accounting practice. The auditors are thus passing an opinion on the profit
(performance) for the year and the assets and liabilities (position) at a moment in time (the reporting
date). In order to establish what is “fair”, a benchmark is needed, because reporting is not a totally
objective activity. The benchmark is generally accepted accounting practice, that is, the practices of
financial accountants that are commonly used and accepted. Most of these have been codified in
GAAP statements, which must therefore be observed.
When comparing “generally accepted accounting practice” to “true” values, especially as they relate to
the valuation of assets, the values will be different. Another way of looking at this is that accountants
do not purport to report on true values. The values offered by accountants in financial statements are
based on a set of principles. Investors, or other users of financial statements need to understand the
GAAP principles, and use the data base presented in financial statements to estimate “true” value.
© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 1

5.3
1. The entity concept
Financial statements measure and report the results of operations of specific entities which are
separate and distinct from the owners of the entity. By understanding and applying this concept, the
personal transactions of the owners will not be recorded or mixed up with the transactions of the
business itself.
2. The historic cost concept
The original price paid for an asset is called its ‘historic cost’. From the date of purchase, the asset is
used and depreciation is deducted from the historic cost. The purpose of the depreciation is to record
an amount which reflects the usage of the asset. The asset is reported in the balance sheet at its
historic cost less the depreciation which has been deducted since the date it was purchased..
3. The going concern concept
Because financial statements are presented periodically during the life of a business, the financial
results and position of that business has to be established on a particular day, the accounting date.
The financial position of a business would have to be reported differently if it was expected that the
business intends to cease its operations. However, most businesses operate as if they intend to
continue operations indefinitely, and in preparing the financial statements it may therefore be assumed
that this is the intention, unless specifically stated to the contrary.
4. The matching concept
If goods are sold during one accounting period, but payment is only received in the next accounting
period, in which period should that amount be treated as profit? If expenses, such as telephone,
electricity or rent are incurred in one accounting period, but only paid in the next period, in which
period should the amount be treated as an expense? This and similar questions are resolved by
applying the matching concept. The matching concept states that revenues and costs are recognised
in the period in which they are earned or incurred, and not in the period in which the money is received
or paid
5. The prudence concept
The word prudence implies being careful, cautious or wise. It is not considered good business practice
to anticipate income if there is a strong likelihood that it will not be received. The prudence concept
states that income should only be recognised when received in the form of cash or if it exists in the
form of other assets, which the business is reasonably certain will eventually become cash and when
provision has been made for all known expenses and losses.
6. The materiality concept
The materiality concept therefore states that financial statements should disclose all items which are
substantial enough to affect evaluations and decisions.
5.4
At the time of purchase, an estimate must be made of the period over which the vehicle will be used
and of the amount which will be received on disposal of the vehicle at the end of its useful life to the
business. The depreciation policy of the business will then be applied to the depreciable amount.
Using the example of a vehicle purchased for R200 000, the following could be the facts after three
years.
Estimated useful life 5 years [Assume]
Estimated disposal value R50 000 [Assume]
Depreciation policy 20% p.a. straight line [Assume]
Therefore depreciable amount R150 000 (R200 000 – R50 000)
Amount to be written off each year R30 000 (20% of R150 000)
Amount written off over three years R90 000 (3 x R30 000)
Value (historic cost) reported in Balance Sheet R110 000 (R200 000 – R90 000)

5.5
Once an entrepreneur, or anyone else, starts a business, the capital investment (R100 000) in this
case, is treated as if it belongs to a different person (the business). The owner however still has a
claim against the business for the amount. It is similar to a loan to the business, except that it bears
more risk (if the business fails, it may not be able to repay the entrepreneur, who will suffer the loss of
his/her capital investment). The business is thus an entity on its own and all exchanges of money or
value between it and the owner must be treated as if a separate person (entity) exists. Examples of
these are drawing of cash in the form of dividends or capital repayments. Thus no owner of a business
should ever mix private and personal transactions with those of the business. Only if this principle is
observed, is it possible to correctly determine the profit of the business, as an entity, over a period.
5.6
 Historic Cost: The machine was purchased at an earlier date for an amount greater than R400
000, and has been depreciated since the date of purchase. GAAP permits the reporting of the
asset at Cost less Accumulated Depreciation. The fact that it could be sold for R450 000 is not
relevant to the historic cost principle.
 Going concern concept: The business is expected to continue its operations and each year the
machine will continue to be depreciated. The effect of this is that each year a portion of the cost of
the machine will be written off against income, to reflect the part of the cost matched to that year. If
the business was not expected to continue its existence, then the asset should be revalued to
reflect the value which could be realised on liquidation of the machine, namely R450 000
 Prudence concept: The financial reports, if they must reflect estimates, will rather reflect a
conservative figure, than report optimistic figures. The effect of this is that depreciation estimates
might be conservative (writing off a higher amount each year, and thus reporting the book value at
a lower value). Another (obvious) reason why the selling (realisable) value of the machine will be
higher is because of inflation, over a period of years.
5.7
The Administrative Expenses account will record all payments made for this account, as well as any
credit transactions. For the financial year, the matching concept requires that all accruals (amount
expended for this account, but not yet recorded) and all prepayments (amounts recorded, but which
will only be “used” in the following financial period). The amount reflected in the Income Statement for
Administrative Expenses for the period, will be the amount which was incurred for the period in order
to generate the Revenue which was realised. [Expensed incurred are matched against Revenue
earned during the financial period– NOT Expenses recorded against Revenue received]
5.8
The amount of R5 400 owing (a credit in Telephone Expense account) at the beginning of the financial
year, was expensed (written off using the matching concept) during the previous year. The payment of
R98 000 during the year (a debit in the Telephone Expense account), includes paying, during the
current year, R5 400 for a previous year expense. The net effect of these two entries is an amount of
R92 600 for current year telephone expenses incurred.
As the business has incurred a further expense of R8 500, (which has not yet been paid), it requires a
further debit to the Telephone Expense account , giving a new balance of R101 100, which is the
expense incurred during the year to be matched against the Revenue earned. The amount of R101
100 will therefore be reported in the Income Statement as the expense for the year, and the amount of
R8 500 will be reported in the Balance Sheet as a creditor, who, at that moment in time, is owed R8
500. This amount will be paid early in the new financial year.

5.9
 Historic Cost concept: Under the historic cost principles, the Investment will be recorded at its cost
of R700 000. In addition to reporting the Investment at its cost, it is customary, to indicate in a note
what the value is on Balance Sheet date. This is important information for the users of the financial
statements.
 Prudence concept: This would dictate that the amount reported should not be re-valued to the
higher value of R900 000. However, if the value was lower than cost of R700 000, prudence would
require the investment to be shown at the lower value.
5.10
This error in the financial reports is so small at R90, that the materiality concept would permit the error
to remain unchanged in the report. It will be of no consequence to any of the users of financial
statements or affect any decision, which may be made on the basis of the information. It should be
noted that from a financial recording perspective, the error may well be corrected for the purpose of
ensuring that all internal records are accurate.
5.11
The following are all possible types of shares which may be issued:
 Ordinary shares (par value or no par value)
Ordinary shareholders are the effective owners of the company and their shares confer the
following rights:
 to attend the shareholders' meeting of the company;
 to elect a board of directors;
 to share in the company's profits by way of dividends, and
 to share in any surplus assets on liquidation of the company.
 Preference shares (par value or no par value)

Preference shares may, in exactly the same way as ordinary shares, be shares with a par value or
shares of no par value. Preference shareholders have preferential rights over ordinary
shareholders with regard to the receipt of a dividend, as dividends on preference shares must be
paid before dividends on ordinary shares can be paid. Preference shares are characterized by a
Non Current dividend rate. Preference shareholders do not normally, in terms of the articles of
association, have a right to vote at shareholders' meetings. They may have preference with regard
to the repayment of capital on liquidation before ordinary shareholders are paid out. There are a
number of classes of preference shares, the most common of which are the following:
 cumulative preference shares
 participating preference shares
 convertible preference shares
 redeemable preference shares.
5.12
Par value shares: These are shares which have a nominal value, for example R1.00, stated on the
face of the share certificate.
No par value shares: Such shares do not have a nominal value and are issued at a price which is
considered appropriate by the directors of the company.
Once the ordinary shares have been issued, the factor of par value or no par value becomes of little or
no interest to shareholders. The shares will trade at a market value and dividends are paid per share,
and are not based on a consideration of any par value.

5.13
 Cumulative preference shares: The dividend accumulates in the event of a period during which
dividends are not paid. No dividend may be paid to ordinary shareholders until the accumulated
dividend has been paid to the preference shareholders
 Participating preference shares: These shares, apart from being entitled to a fixed dividend, will
also carry a clause indicating some share of profits granted to ordinary shareholders. Preference
shareholders thus benefit in receiving a fixed dividend, but also sharing in the fortunes of the
company.
 Convertible preference shares: These shares may be converted into ordinary shares at some fixed
future date, at a price agreed at the date of issue. The shareholder usually has the option to
convert, that is they may choose not to convert (in the event of the ordinary shares not doing well,
they may decide not to convert)
 Redeemable preference shares: This is the only form of share which allows for the capital to be
returned to the shareholder at a future date. It is thus similar to a loan.
5.14
A company usually has growth as one of its objectives. In order to grow, it required additional capital
from investors. Investors have different needs and objectives. Some are seeking investments with a
high degree of certainty (low risk), while others may be prepared to take on more risk in the hope of
achieving a higher return. Financial managers, wanting to raise capital design different financial
instruments (types of shares), in order to appeal to a wider sector of the investment community, and
thus attract more capital, albeit in various forms.
5.15
The term 'distributable reserve' in defined in statute, as any amount which has been carried to
reserves and which may, in accordance with generally accepted accounting practice and legal
principles, be taken to the credit of the income statement and distributed by way of dividend, and does
not include any amount retained by way of providing for any known liability. The paragraph does not
define non-distributable reserves, but merely states that non-distributable reserves shall be construed
in accordance with the definition of distributable reserves.
The disclosure of an item as a non-distributable reserve in the balance sheet provides an indication to
shareholders and lenders that the company may not, and does not intend to, distribute the funds thus
classified. This means that they may never be paid out in the form of dividends to the shareholders.
Amounts listed under distributable reserves may, however, be paid out in the form of dividends.
5.16
A reserve is often considered to be an amount of money set aside somewhere. It is not. A reserve is
simply profits that have been made by a company (as a result of operations, or as a result of holding
assets which increase in value), and which have not be distributed (hand back to) to the investors. As
these assets are reported in the Balance Sheet, the amounts must also be shown as belonging to the
shareholders (otherwise the Balance Sheet would not “balance”). Reserves thus indicate value
belonging to the shareholders, but it is not necessarily in the form of cash. Most usually it is invested in
all the assets of the business.
5.17
A company may decide to take out long term loans or to issue Debentures.

5.18
A debenture is a long-term loan from the public raised in small amounts such as R10 or R100, usually
at a fixed rate of interest and with specified repayment terms. It is issued as a form of debt in order to
raise funds for the long-term financing of the business operations of a company. Debentures may be
issued at a discount or at a premium because they are usually registered at a particular interest rate,
while the interest rate in the market fluctuates from time to time. In order to ensure that the debentures
remain attractive, the debentures must offer the lender a return equivalent to that which can be
obtained from similar financial instruments in the market place at that time. In order to achieve this
return, debentures are often offered at a discount or at a premium.
Debenture-holders who hold secured debentures have the assurance that in the event of the company
experiencing financial hardship, the amount which the debenture-holder has lent to the company is
secured by an asset such as land and buildings. This is not the case if debentures are unsecured.
5.19
Depreciation expense account is a nominal account. It represents the portion of the depreciable
amount of an asset which is allocated to depreciation during a financial year. It thus represents the
cost incurred by the business during the year for the use of an asset in earning income. As it is a
nominal account, it is written off at the end of each financial year to the profit and loss account and the
balance in the account at the beginning of each financial year will thus be nil.
Accumulated depreciation account is a real account which is credited whenever depreciation expense
is debited. As it is a real account, the balance in the accumulated depreciation account is not written
off annually to the profit and loss account - rather, the annual depreciation change is "accumulated" in
the accumulated depreciation account. Consequently, as an asset becomes older and more
depreciation is written off, the balance in the accumulated depreciation account becomes larger. The
net book value of the asset therefore becomes smaller, as book value is represented by the original
cost less accumulated depreciation at the point in time when the financial position of the business is
being reported.
5.20
As with all predictions, an estimate of future events is essential. The estimate that is required in this
case is the rand amount of debtors who are unlikely to be able to settle their debts. When making
predictions, the most common method is to use historical data in order to estimate the future. The
assumption underlying this approach is that all other things remaining equal, the past will be repeated
in the future. In addition to this, however, expected economic conditions should also be taken into
account. For example, during a recession or before an expected recession it is likely that bad debts
will increase rather than decrease.
The data most frequently used to predict bad debts is a list of debtors, usually in the form of an age
analysis, in which debtors are analysed by period and amount outstanding. Varying percentages for
estimated doubtful debts can then be applied to the different categories of debtors. Alternative
methods include the application of a single percentage to total debtors or to credit sales for the
financial year.
5.21
The accrual basis of accounting recognises revenue as income when the criteria of performance,
measurability and collectibility have been met. For most business operations, the delivery of the goods
or provision of the services and the invoicing take place virtually simultaneously. As both parties are
acting in good faith, the revenue is recognised as having been earned at that point. All recorded sales,
both cash and credit, are therefore reflected in the income statement at the end of a period.
Despite the recognition of all credit sales as revenue, it is widely known that, given the vagaries of
business and the fact that no credit control system is infallible, certain of the revenue recognised will
not ultimately be received in cash, that is, some debtors will default.

At the end of a financial period, the risk of default is dependent upon the amount owed by debtors at
that time. Some proportion of the debtors' amount - based on previous experience, knowledge of the
debtors and predicted economic circumstances - must be set aside, in accordance with the concept of
prudence, for the eventuality of non-payment by some debtors. Such a provision for doubtful debts
also accords with the matching concept, as the amount, which may not be collected in the subsequent
accounting period, is, in reality, a loss, which relates to the financial period in which the sale took
place. For these reasons, a provision for doubtful debts must be created at each reporting date.
5.22
Robson Ltd
a) Original Plant and Machinery

Calculation of depreciation for the year ended 30 June 20.1
Cost on 1 Jan 20.1 R120 000
Residual value R10 000
Depreciable amount R110 000
Amount written of each full financial year R110 000/10
R11 000
Additional plant and machinery:

Cost on 1 Dec 20.4 R66 000
Residual value R3 000
Depreciable amount R63 000
Depreciation 7 Months (63000/6) x (7/12) R6 125
New plant manufactured:

Cost (15 000 + 38 000) R53 000
Depreciation 2 months R53 000 x 0,25 x 2/12 R2 208
Total Depreciation for the year ended 30 June 20.4
R11 000 + R6 125 + R2208 R19 333
b) Income statement of Robson Ltd for the year ended 30 June 20.1
Income xxx
Depreciation 19 333
Balance sheet at 30 June 20.1
Non CurrentAssets
COST ACCUMULATED BOOK
DEPRECIATION VALUE
120,000 38,500 81,500
66,000 6,125 59,875
53,000 2,208 50,792
239,000 46,833 192,167
Note to the balance sheet

Plant and machinery is depreciated on a straight-line basis to reduce the assets to their
estimated residual values, as follows:
Acquired before 30 June 20.1 10 % p.a.
Acquired during the current year 162/3% p.a.
Manufactured 25% p.a.

Workings: Book value of Plant and Machinery purchased on 1 January 20.1
Book value on 30 June 20.4 = R120 000 –(11 000 x 3½ years)
= R120 000 – R38 500
= R81 500

5.23
Fedoc Distributors Ltd
a) General journal of Fedoc Distributors Ltd
20.0
Jul 1 Motor vehicles 30000
Bank 30000
Purchase of new vehicle
Dec 1 Equipment 18000
Creditors' control (Quip Ltd) 18000
Purchase of equipment on credit
b)
20.1
Jun 30 Depreciation 55 450
Accumulated deprec. on buildings 4000
Accumulated deprec. on motor veh. 18 000
Accumulated deprec. on equipment 33 450
Depreciation for the year as per accounting policies
c)
20.1
Jun 30 Profit and loss 55 450.
Depreciation 55 450
Closing transfer of depreciation
d) Balance sheet at 30 June 20.1

Non Current assets Note 1 758 550
Notes:
1. Non Current assets
COST ACCUMULATED BOOK
DEPRECIATION VALUE
Land and Buildings 390,000 25,000 365,000

Motor Vehicles 150,000 65,000 85,000
Equipment 478,000 169,450 308,550
1,018,000 259,450 758,550

5.24
a) General journal of Sharkey (Pty) Ltd for January 20.1
3 Bad debts 500
J Gone 500
Account written off as bad
7 Bank 140
Bad debts 560
S Shaky 700
Received 20c in the R1 from insolvent estate
11 Bad debts 260
M Maybe 260
Account written off as bad
14 L Lazarus 360
Bad debts recovered 360
L Lazarus, previously written off reinstated as a debtor
14 Bank 360
L Lazarus 360
Account settled
31 Bank 7160
Debtors 7160
Cash received from debtors (7 300 - 140)
31 Debtors (specified individually) 8600
Sales 8600
Credit sales for the month
b) 31 Profit and loss 960

Bad debts recovered 360
Bad debts expense 1320
Closing transfer (500 + 560 + 260 - 360)

5.25
Gemini Financial Brokers Limited
a) AND b)
General Ledger
Ordinary share capital

20.1
Feb 1 Balance b/d 100,000
22 Bank 10,000
Longterm loan
20.1
Investments
20.1
Office equipment
20.1
Accumulated depreciation - office equipment
20.1
Feb 28 Depreciation 3,000
Bank
20.1 20.1
Feb 1 Balance b/d 16,208 Feb 5 Wages 700
3 Div. received 4,800 7 Electricity 642
9 Serv. rendered 9,650 12 Wages 700
19 Comm. earned 4,679 15 Cons. stores 1,435
22 Ordinary share 21 Wages 1,350
capital 10,000 23 Salaries 16,340
26 Rent 1,300
Feb 28 Balance c/d 22,870
45,337 44,337
Mar 1 Balance b/d 22,870
Services rendered
20.1
9 Bank 9,650
303,450
Commission earned
20.1
19 Bank 4,679
89,309
Dividends received
20.1
3 Bank 4,800
9,600
Salaries
20.1
23 Bank 16,340
204,685
Rent
20.1
26 Bank 1,300
6,800
Wages
20.1
5 Bank 700
12 Bank 700
21 Bank 1,350
25,750

Electricity
20.1
7 Bank 642
8,099
Consumable stores
20.1 20.1
Feb 1 Balance b/d 120,220 Feb 28 Consumable stores
15 Bank 1,435 onhand 8,540
113,115
Interest on loan
20.1
Feb 28 Accrued expenses 3,600
Consumable stores on hand
20.1
Feb 28 Cons stores 8,540
Depreciation
20.1
Feb 28 Acc Dep. 3,000
[Off Equip]
Accrued expenses
20.1
Feb 28 Interest on loan 3,600
c)
Post adjustment trial balance at 28 February 20.1

Debit Credit
Ordinary share capital 110,000
Long-term loan 20,000
Investments 127,500
Office equipment 15,000
Acc dep: Equipment 3,000
Bank 22,870
Services rendered 303,450
Commission earned 89,309
Dividends received 9,600
Salaries 204,685
Rent 6,800
Wages 25,750
Electricity 8,099
Consumable stores 113,115
Interest on loan 3,600
Consumable stores on hand 8,540
Depreciation 3,000
Accrued expenses 3,600
538,959 538,959

d)
Income statement for the year ended 28

February 20.1
Income 402,359
Commission earned 89,309
Dividends received 9,600
Less: Expenses 365,049
Salaries 204,685
Rent 6,800
Wages 25,750
Electricity 8,099
Depreciation 3,000
Net income 37,310
Balance sheet at 28 February 20.1

Equity and Liabilities
Shareholders' equity 147,310
Share capital 110,000
Retained income 37,310
Long term loan 20,000
167,310
Assets
Non Current assets 1 12,000
Investments 127,500
Net current assets 27,810
Current assets 31,410
Stock 8,540
Bank 22,870
Less Current liabilities 3,600
167,310
NOTE 1 Cost Accumulated Book

depreciation value
Office equipment 15,000 3,000 12,000
e) Return on equity = 37 310/100000 = 37,3%

OR = 37 310 / 167 310 = 22,3%
Note that conceptually, ROE should be calculated on the amount invested at the beginning of
the period. If additional capital is injected, the weighted average of the capital investment over
the period should be used. As the additional amount of R10 000 was invested very close to the
end of the year, the first calculation of around 37% is quite accurate. In practice, analysts tend to
use the second calculation (the equity at the end of the period). While this is not conceptually
appealing, the most significant issue is that the formula chosen be used consistently over the
years for comparison.

f) The market value of the company's investments may have changed There may have been a
change in key personnel The economic climate may have changed Competitors may have
entered the company's market Demand for the services of the company may have changed
These factors will affect the value of the business and its future prospects.
g) The level of income earned by the company is adequate to cover the interest expense, without
incurring a loss. The company is, furthermore, sufficiently liquid to pay the interest due. No
guarantee exists, however, that the company will still be liquid enough to repay the loan on 30
April 20.4.

5.26
Namesor (Pty) Limited: General ledger
Bank 10
Sept 1 Balance b/d 12,160 Sept 3 Creditors 21 4,650
2 Commission rec 17 2,500 4 Advertising 18 150
6 Commission rec 17 4,800 9 Salaries 19 900
8 Debtors 22 2,000 10 Telephone 20 170
30 Balance c/d 15,590
21,460 21,460
Oct 1 Balance b/d 15,590
Share capital 11
Sept 1 Balance b/d 40,500
Stock of stationery 12
Sept 1 Balance b/d 435
1 Creditors 21 150
585
Office equipment 13
1 Creditors 21 4,500
5 Creditors 21 950
12,845
Motor vehicle 14
Property 15
Mortgageloan 16
Commission received 17
2 Bank 10 2,500
6 Bank 10 4800
7 Debtors 22 2,000
77,400
Advertising 18
Sept 1 Balance b/d 730
4 Bank 10 150
880
Salaries 19
9 Bank 10 900
8,300
Telephone 20
10 Bank 10 170
1,550
Creditors (Office Suppliers Limited) 21
Sept 3 Bank 10 4,650 Sept 1 Stationery 12 150
30 Balance c/d 950 1 Equipment 13 4,500
5 Equipment 13 950
5,600 5,600
Oct 1 Balance b/d 950
Debtors (JStreet) 22
Sept 7 Commission rec 17 2,000 Sept 8 Bank 10 2,000
c)
Trial balance at 30 September 20.0

Fol. Debit Credit
Bank 10 15,590
Share capital 11 40,500
Stock of stationery 12 585
Office equipment 13 12,845
Motor vehicle 14 8,100
Property 15 131,000
Mortgage loan 16 60,000
Commission received 17 77,400
Advertising 18 880
Salaries 19 8,300
Telephone 20 1,550
Creditors 21 950
178,850 178,850

5.27
Rolling Lawns (Pty) Ltd General ledger of Rolling Lawns for April 20.1
Bank
Apr 1 Balanceb/d 9,540 Apr 1 Telephone 56
3 Serv. rendered 1,678 4 Machinery 483
11 Serv. rendered 2,500 7 Consumable stores 253
28 Serv. rendered 2,879 9 Advertising 20
15 Repairs 732
17 Wages 769
28 Loan:Standard Bank 2,500
Fuel 152
Office equipment 900
Stationery 75
30 Balancec/d 8,657
16,597 16,597
May 1 Balanceb/d 8,657
Cash float
Apr 1 Balanceb/d 50
Share capital
Apr 1 Balanceb/d 10,000
Vehicles
Machinery
4 Bank 483
11,983
Office equipment
Apr 30 Bank 900
Loan:Standard Bank
Apr 28 Bank 2,000 Apr 1 Balanceb/d 25,000
30 Balancec/d 23,000
25,000 25,000
May 1 Balanceb/d 23,000
Telephone
1 Bank 56
2,738
Consumable stores expense
7 Bank 253
3,143
Advertising
Apr 1 Balanceb/d 703
9 Bank 20
723
Repairs
15 Bank 732
1,414

Wages
17 Bank 769
3,365
Interest on loan
28 Bank 2,500
5,000
Fuel
28 Bank 152
712
Stationery
28 Bank 75
184
Services rendered
Apr 1 Balance b/d 23,465
3 Bank 1,678
11 Bank 2 500
28 Bank 2,879
30 522
c)
Trial balance of Rolling Lawns (Pty) Ltd at 30

April 20.1
Debit Credit
Bank 8,657
Cash float 50
Vehicles 24,653
Machinery 11,983
Loan:Standard Bank 23,000
Telephone 2,738
Consumable stores expense 3,143
Advertising 723
Repairs 1,414
Wages 3,365
Fuel 712
Stationery 184
63,522 63,522

d)
Income statement of Rolling Lawns

for the six months ended 30 April
20.1
INCOME 30,522
EXPENSES 17,279
Telephone 2,738
Advertising 723
Repairs 1,414
Wages 3,365
Fuel 712
Stationery 184
Net income for the period 13,243
Balance sheet at 30 April 20.1

Equity and Liabilities
Longterm liabilities 23,000
20% loan 23,000
46,243
Assets
Non Current assets 37,536
Vehicles 24,653
Machinery 11,983
Bank 8,657
Cash float 50
46,243

5.28
BALANCE SHEET OF GALACTIC ON 31 MARCH

20.6
ASSETS
Non Current Assets 170,000
At cost 510,000
Accumulated Deprec 340,000
Investment in Wonder Ltd 100,000
Net Current Assets 302,100
Current Assets 729,700
Inventory (302 500 + 3 400) 305,900
Debtors (421 000 - 400) 420,600
Expenses Prepaid 3,200
Current Liabilities 427,600
Bank Overdraft 127,700
Creditors 216,000
Expenses Accrued (Interest) 2,700
Receiver for Tax 11,200
Shareholder for Dividends 70,000
572,100
EQUITY AND LIABILITIES
Ordinary Shareholders 512,100
Share Capital 100,000
Retained Income 412,100
Long-term Debentures 60,000
572,100
INCOME STATEMENT OF GALACTIC FOR THE

YEAR ENDED 31 MARCH 20.1
Sales 995,000
Less : Cost of Sales 454,700
Gross Profit 540,300
Salaries 199,300
Administrative Expenses 88,900
Operating Expenses 29,100
Bad Debts 1,700
Depreciation 30,000
Profit before interest and tax 191,300
Interest on debentures 10,800
Net Profit before Taxation 180,500
Taxation 23,400
Net Profit after tax 157,100
Beginning retained earnings 325,000
Ending retained earnings 412,100

5.29
Post Adjustment Trial Balance of Cotton Knitters Ltd at 31

March 20.3
Ordinary shares of R1 150,000
12% Debentures 50,000
Vehicles 236,000
Accumulated Depreciaiton on Vehicles 101,800
Bank 35,770
Creditors 267,830
Debtors (548900-900) 548,000
Investment in Associate company 165,000
Inventory 542,900
Interest Payable * 3,000
Stationery on hand * 1,750
Salaries Payable* 1800
SARS for Tax 51900
Sales 1,674,340
Cost of Sales 674,200
Salaries Payable (98650+1800) 239,620
Administrative Expenses (98650-1750) 96,900
Bad Debts (2560+900) 3,460
Interest on Debentures (3000+3000) 6,000
Taxation Expense 98,600
Depreciation (20% x R236000) 47,200
2,729,900 2,729,900
INCOME STATEMENT OF COTTON

KNITTERS FOR THE YEAR ENDED 31
MARCH 20.3
Sales 1,674,340
Less : Cost of Sales 674,200
Gross Profit 1,000,140
Salaries 239,620
Administrative Expenses 96,900
Bad Debts 3,460
Depreciation 47,200
Profit before interest and tax 578,460
Interest on debentures 6,000
Net Profit before Taxation 572,460
Taxation 98,600
Net Profit after tax 473,860
Beginning retained earnings 429,230
Ending retained earnings 903,090

BALANCE SHEET OF COTTON KNITTERS
ON 31 MARCH 20.3
ASSETS
Non Current Assets 134,200
At cost 236,000
Accumulated Deprec -101,800
Investment in Associate 165,000
Net Current Assets 803,890
Current Assets 1,092,650
Inventory 542,900
Debtors 548,000
Expenses Prepaid 1,750
Current Liabilities 288,760
Bank Overdraft -35,770
Creditors 267,830
Expenses Accrued (Interest) 4,800
Receiver for Tax 51,900
Shareholder for Dividends
1,103,090

5.30
Unisex Hairstylists Limited
a)
Trial balance of Unisex Stylists Limited at 31 March 20.1
REAL ACCOUNTS
Vehicles 84,600
Accumulated depreciation on vehicles 20,000
Furniture 30,000
Accumulated depreciation on furniture 600
Equipment 21,000
Accumulated depreciation on equipment 6,200
Stock of consumable stores 3,450
Non Current deposit: Santambank 10,000
Debtors 740
Cash at bank 8,397
Long-term loan from Standard Bank 5,000
Creditors 3,740
NOMINAL ACCOUNTS
Electricity and water 1,341
Salaries and wages 17,927
Advertising 2,349
Interest on loan 550
Rent paid 12,370
Stationery 491
Telephone 609
Fee income 92,886
Repairs 1,906
Depreciation 12,390
Bank charges 876
210,886 210,886

b) and c)
Income statement of Unisex Stylists Limited

for the year ended 31 March 20.1
Fee income 92,886
Expenses 52,699
Advertising 2,349
Interest on loan 550
Rent paid 12,370
Stationery 491
Telephone 609
Repairs 1,906
Depreciation 12,390
Bank charges 876
Net Profit 40,187
Balance sheet of Unisex Stylists Limited at 31

Long-term liability 5,000
Current liabilities 6,200
Creditors 3,740
131,387
ASSETS
Non Current assets Note 1 108,800
Investments
Fixed deposit: Santambank 10,000
Stock of consumable stores 3,450
Debtors 740
Cash at bank 8,397
131,387
NOTE 1 Cost AccDep Bookvalue
Vehicles 84,600 20,000 64,600
Furniture 30,000 600 29,400
Equipment 21,000 6,200 14,800
135,600 26,800 108,800

5.31
a)
Taurus Financial Brokers Limited
Journal of Taurus Financial Brokers Limited for February
20.1
3 Bank 7,560
Investment revenue 7,560
Income received from investments
5 Wages 700
Bank 700
Wages paid for the week
7 Utilities expense 442
Bank 442
Payment for electricity
9 Bank 8,450
Fee revenue 8,450
Income received for services rendered
12 Wages 700
Bank 700
Wages paid for the week
15 Consumable stores 1,565
Bank 1,565
Payment for petrol
17 Creditors 1,200
Bank 1,200
Payment to creditors
19 Bank 3,590
Fee revenue 3,590
Received a cheque for commission
21 Wages 1,550
Bank 1,550
Wages paid for the remainder of month
22 Bank 12,000
12 000 additional shares issued
23 Salaries 18,340
Bank 18,340
Salaries paid for the month
28
(i) Rent expense 500
Accrued expenses 500
February rent payable
Accrued income 200
Rent revenue 200
February rent receivable
(ii) Depreciation 3,000
Accumulated depreciation 3,000
on office equipment.
Depreciation of office equipment
for the year (15 000 x 20%)
(iii) Accrued income 2,685
Interest receivable on investments
(iv) Salaries 2,300
Wages 2,300
Correction of incorrect entry
(v) Utilities expense 296
February 20.1 electricity and water
bills due
(vi) Interest on loan 9,000
Interest due for the year (50 000 x 18%)
(vii) Consumable stores on hand 5,250
Consumable stores on hand at
28 February 20.1
(viii)Taxation paid 18,350
Taxation owing 18,350
Company tax due for the year
(ix) Dividends 5,000
Shareholders for dividends 5,000
Dividend declared on shares issued
before 15 February 20.1

b)
Ledger of Taurus Financial Brokers Ltd
Bank
Feb 1 Balance b/d 30,708 Feb 5 Wages 700
3 Investment revenue 7,560 7 Utility expense 442
9 Fee revenue 8,450 12 Wages 700
19 Fee revenue 3,590 15 Consumable stores 1,565
22 Share capital 12,000 17 Creditors 1,200
21 Wages 1,550
23 Salaries 18,340
28 Balance c/d 37,811
62,308 62,308
Investment revenue
Feb 3 Bank 7,560
28 Accrued income 2,685
10,245
Wages
Feb 1 Balance b/d 33,000 Feb 28 Salaries 2,300
5 Bank 700
12 Bank 700
21 Bank 1,550
35,950
33,650
Salaries
23 Bank 18,340
28 Wages 2,300
308,985
Utilities expense
7 Bank 442
28 Accrued expenses 296
9,195
Fee revenue
9 Bank 8,450
19 Bank 3,590
527,270
Consumable stores
Feb 1 Balance b/d 28,720 Feb 28 Consumable stores 5,250
15 Bank 1,565
30,285
Creditors
Feb 17 Bank 1,200 Feb 1 Balance b/d 14,000
12,800

Share capital
22 Bank 12,000
112,000
Rent expense
6,000
Rent revenue
28 Accrued income 200
2,400
Accrued expenses
Feb 28 Rent expense 500
Utilities expense 296
9,796
Accrued income
Feb 28 Rent revenue 200
2,885
Depreciation
Feb 28 Accum. depreciation
on office Equip 3,000
Accumulated depreciation on office equipment

Feb 28 Depreciation 3,000
Interest on loan
Feb 28 Accrued expenses 9,000
Feb 28 Consumable stores 5,250
Tax paid
28 Taxation owing 18,350
24,550
Taxation owing
Feb 28 Taxation paid 18,350
Dividends
Feb 28 Shareholders for
dividends 5,000
Shareholders for dividends
20.1
Feb 28 Dividends 5,000

c)
Taurus Finanical Brokers Limited

Post-adjustment trial balance at 28 February 20.1
Long-term loan @ 18% 50,000
Accumulated depreciation:Equipment 3,000
Investments 257,000
Debtors 8,500
Accrued income 2,885
Bank 37,811
Creditors 12,800
Fee revenue 527,270
Rent revenue 2,400
Rent expense 6,000
Wages 33,650
Salaries 308,985
Utilities expense 9,195
Depreciation 3,000
Tax paid 24,550
Dividends 5,000
750,861 750,861
d)
Closing transfers of Taurus Financial Brokers Limited
for February 20.1
28 Fee revenue 527,270

Rent revenue 2,400
Profit and loss 539,915
Closing entry i.r.o. of income accounts
Rent expense 6,000
Wages 33,650
Salaries 308,985
Depreciation 3,000
Tax paid 24,550
Closing entry in respect of expense
accounts
Closing of profit and loss to retained
income
Dividends 5,000
Closing of dividends to retained income

Wages
Feb 1 Balance b/d 33,000 Feb 28 Salaries 2,300
5 Bank 700 28 Profit and loss 33,650
12 Bank 700
21 Bank 1,550
35,950 35,950
Salaries
Feb 1 Balance b/d 288,345 Feb 28 Profit and loss 308,985
23 Bank 18,340
28 Wages 2,300
308,985 308,985
Utilities expense
7 Bank 442
28 Accrued expense 296
9,195 9,195
Fee revenue
9 Bank 8,450
19 Bank 3,590
527,270 527,270
Consumable stores
15 Bank 1,565 on hand 5,250
30,285 30,285
Rent expense
6,000 6,000
Rent revenue
Feb 28 Profit and loss 2,400 Feb 1 Balance b/d 2,200
28 Accrued income 200
2,400 2,400
Depreciation
Feb 28 Accum Dep Feb 28 Profit and loss 3000
on office Equip 3,000
Interest on loan
Feb 28 Accrued expenses 9,000 Feb 28 Profit and loss 9,000
Tax paid
28 Taxation owing 18350
24550 24550
Dividends
Feb 28 Shareholders for Feb 28 Retained income 5,000
dividends 5,000
Investment revenue
Feb 28 Profit and loss 10,245 Feb 3 Bank 7,560
28 Accrued income 2,685
10,245 10,245

Profit and loss
Feb 28 Rent expense 6,000 Feb 28 Fee revenue 527,270
Wages 33,650 Rentrevenue 2,400
Salaries 308,985 Investmentrevenue 10,245
Depreciation 3,000
Tax paid 24,550
539,915 539,915
Retained income
Feb 28 Dividends 5,000 Feb 28 Profit and loss 120,500
Balance c/d 115,500
120,500 120,500
e)

Income statement for the year ended 28
February 20.1
INCOME 539,915
Fee revenue 527,270
Rent revenue 2,400
EXPENSES 394,865
Salaries 308,985
Rent expense 6,000
Wages 33,650
Depreciation 3,000
NET INCOME BEFORE TAXATION 145,050
TAXATION 24,550
NET PROFIT TO SHAREHOLDERS 120,500
ORDINARY DIVIDENDS 5,000
RETAINED INCOME AT END OF YEAR 115,500

f)

Balance sheet at 28 February 20.1
Long-term liabilities 50,000
Long-term loan @ 18% 50,000
Creditors 12,800
323,446
ASSETS
Cost 15,000
Less Accumulated Depreciation 3,000
Investments 257,000
Debtors 8,500
Bank 37,811
323,446
g) The return on equity earned by the shareholders amounts to

120 500 / 227 500 = 53%
This would appear to be a very favourable return for shareholders, considering that it is the first
year of operation. The company has paid out a dividend of R5 000; thus indicating the intention
to retain most of its profits in the business for future growth.
The return on the investment which the company has made amounts to 10 245 / 257 000 =
4,0% which is lower than the interest of 18% payable on the long-term loan. It is not clear,
however, whether there has been any capital growth in the value of the investments; if there has
been no capital growth, the investment could be utilized better by redeeming the long-term loan.

h) Alternative method 1
Treat the "Consumable stores" account as an asset account.
Consumable stores
15 Bank 1,565 expense 25,035
Balance c/d 5,250
30,285 30,285
Consumable stores expense
Feb 28 Consumable stores 25,035 Feb 28 Profit and loss 25,035
Alternative method 2
(as used in the solution)
Treat the "Consumable stores" account as an expense account.
Consumable stores
15 Bank 1,565 on hand 5,250
30,285 30,285

Feb 28 Consumable stores 5,250
i) (1) Investments - these are stated at cost and there is no indication of the market value. It is,
therefore, difficult to assess whether the amount reflected in the balance sheet is over- or under-
valued. The prudence concept requires the amount to be written down if the market value is
lower than the cost. (The same reasoning applies in the case of consumable stores.)
(2) Office equipment - this is stated at net book value and is unlikely to reflect its actual
value. It is difficult to assess whether it is over- or under-valued because of the lack of
information.

5.32
a)
Wetwell (Pty) Limited

General journal of Wetwell (Pty) Ltd for April 20.1
(Narrations have been omitted)
April
30 Consumable stores expense 112 3,165
Stock of consumable stores 4 3,165
Accrued income 9 2,750
Service income 104 2,750
Prepaid expenses 10 1,428
Insurance 106 1,428
Stationery on hand 11 439
Stationery 107 439
Stationery 107 235
Salaries and wages 103 235
Electricity and water 108 345
Telephone 109 208
Accrued expenses 12 553
Depreciation 113 22,625
Accumulated depreciation on
equipment XX 10,000
Accumulated depreciation on
motor vehicles (5685 + 6940) XX 12,625
Deferred expenditure 15 42,533
Research and development 111 42,533
Taxation 114 26,450
Receiver of Revenue 16 26,450
Dividends 115 17,600
Shareholders for dividends 17 17,600

b) General ledger of Wetwell (Pty) Ltd
Note: The closing journal entries from part (d) have also been entered in the ledger accounts
which follow.
Note: The general journal folio numbers have not been inserted in the above accounts. This
should be done as soon as each amount is posted from the general journal to a general ledger
account.
Share capital 1
20.1
Bank 2
20.1
Equipment 3
20.1
Stock of consumable stores 4

20.1 20.1
Apr 30 Balance b/d 3,525 Apr 30 Consumable stores
expense 3,165
Balance c/d 360
3,525 3,525
May 1 Balance b/d 360
Motor vehicles 5
20.1
Creditors 6
20.1
Debtors 7
20.1
Provisional tax payments 8

20.1 20.1
Apr 30 Balance b/d 23,700 Apr 30 Receiver of Revenue 23,700
a
Accrued income 9
20.1
Apr 30 Service income 2,750
Prepaid expenses 10
20.1
Apr 30 Insurance 1,428
Stationery on hand 11
20.1
Apr 30 Stationery 439
Accrued expenses 12
20.1
Apr 30 Electricity and water 345
Telephone 208
553
Accumulated depreciation on equipment 13

20.1
Apr 30 Depreciation 10,000

Accumulated depreciation on motor vehicles 14
20.1
Apr 30 Depreciation 12,625
Deferred expenditure 15
20.1
Apr 30 Research and
development 42,533
Receiver of Revenue 16
20.1 20.1
Apr 30 Provisional tax Apr 30 Taxation 26,450
payments 23,700
Balance c/d 2,750
26,450 26,450
May 1 Balance b/d 2,750
Shareholders for dividends 17

20.1
Apr 30 Dividends 17,600
Retained income 18
20.1 20.1
Apr 30 Dividends 17,600 Apr 30 Profit and loss 75,359
Balance c/d 57,759
75,359 75,359
May 1 Balance b/d 57,759
Rental 101
20.1 20.1
20.1
Apr 30 Balance b/d 31,500 Apr 30 Profit and loss 31,500
Advertising 102
20.1 20.1
Salaries and wages 103

20.1 20.1
Apr 30 Balance b/d 82,377 Apr 30 Stationery 235
82,377 82,377
Service income 104

20.1 20.1
Apr 30 Profit and loss 358,000 Apr 30 Balance b/d 355,250
358,000 358,000
Directors' fees 105

20.1
Insurance 106
20.1 20.1
Apr 30 Balance b/d 14,850 Apr 30 Prepaid expenses 1,428
14,850 14,850

Stationery 107
20.1 20.1
Apr 30 Balance b/d 1,548 Apr 30 Stationery on hand 439
Salaries and wages 235 Profit and loss 1,344
1,783 1,783
Electricity and water 108

20.1 20.1
12,125 12,125
Telephone 109
20.1 20.1
1,798 1,798
Motor vehicle expenses 110

20.1 20.1
Research and development 111

20.1 20.1
Apr 30 Balance b/d 65,200 Apr 30 Deferred
expenditure 42,533
65,200 65,200
Consumable stores expense 112

20.1 20.1
Apr 30 Stock of consumable Apr 30 Profit and loss 3,165
stores 3,165
Depreciation 113
20.1 20.1
Apr 30 Accumulated deprec. Apr 30 Profit and loss 22,625
on equipment 10,000
Accumulated deprec.
on motor vehicles 12,625
22,625 22,625
Taxation 114
20.1
Apr 30 Receiver of Revenue 26,450 Apr 30 Profit and loss 26,450
Dividends 115
20.1 20.1
Apr 30 Shareholders for
dividends 17,600 Apr 30 Retained income 17,600

Profit and loss
20.1 20.1
Apr 30 Rental 31,500 Apr 30 Service income 358,000
Advertising 17,983
Directors' fees 40,000
Insurance 13,422
Stationery 1,344
Electricity & water 12,125
Telephone 1,798
Motor vehicle
expenses 7,420
Research and
development 22,667
Consumable stores
expense 3,165
Depreciation 22,625
Taxation 26,450
358,000 358,000
c)
Wetwell (Pty) Ltd
Post-adjustment trial balance at 30 April 20.1
Fol Debit Credit
Real accounts
Share capital 1 110,000
Bank 2 31,257
Equipment, at cost 3 50,000
Stock of consumable stores 4 360
Motor vehicles, at cost 5 64,380
Creditors 6 28,690
Debtors 7 46,830
Provisional tax payments 8 23,700
Accrued income 9 2,750
Prepaid expenses 10 1,428
Stationery on hand 11 439
Accrued expenses 12 553
Accumulated depreciation on equipment 13 10,000
Accumulated depreciation on motor vehicles 14 12,625
Deferred expenditure 15 42,533
Receiver of Revenue 16 26,450
Shareholders for dividends 17 17,600
Nominal accounts
Rental 101 31,500
Advertising 102 17,983
Salaries and wages 103 82,142
Service income 104 358,000
Directors' fees 105 40,000
Insurance 106 13,422
Stationery 107 1,344
Electricity and water 108 12,125
Telephone 109 1,798
Motor vehicle expenses 110 7,420
Research and development 111 22,667
Consumable stores expense 112 3,165
Depreciation 113 22,625
Taxation 114 26,450
Dividends 115 17,600
563,918 563,918

d)
General Journal of Wetwell (Pty) Ltd for April 20.1

Apr
30 Profit and loss 282,641
Rental 31,500
Advertising 17,983
Insurance 13,422
Stationery 1,344
Telephone 1,798
Motor vehicle expenses 7,420
Research and development 22,667
Depreciation 22,625
Taxation 26,450
30 Service income 358,000
Dividends 17,600
Receiver of Revenue 23,700
Provisional tax payments 23,700
Once the amounts above and in part (a) have been posted to the ledger accounts,
the folio numbers of the accounts should be inserted in the general journal.
e)
Income statement of Wetwell (Pty) Ltd for the

year ended 30 April 20.1
Service income 358,000
Rental 31,500
Advertising 17,983
Insurance 13,422
Stationery 1,344
Telephone 1,798
Motor vehicle expenses 7,420
Research and development 22,667
Depreciation 22,625
Net income before taxation 101,809
Taxation 26,450
Net profit after taxation 75,359
Dividends 17,600
Retained income for the year 57,759

f)
Balance sheet of Wetwell (Pty) Limited at 30 April
20.1
Creditors 28,690
Receiver of Revenue 2,750
217,352
ASSETS
Equipment 40,000
At cost 50,000
Motor vehicles 51,755
At cost 64,380
Deferred expenditure 42,533
Stock (360 + 439) 799
Debtors 46,830
Prepaid expenses 1,428
Bank 31,257
217,352
g)
The company's results reflect a positive start for the business. The net profit percentage (after
tax) of 21.1% (75 359/358 000) should be compared to percentages achieved by other
companies in the same business in order to assess the results more objectively. The treatment
of the research and development expenditure has a material impact on the results (see (h) for
further comments).
h)
In determining the expense for the year for research and development, the amount of R21 200,
which was in respect of research done, has been written off during the year. This is in line with
the prudence concept as it is difficult to estimate accurately any future income which will arise
from the research alone. Andries has estimated future income from implementing the new
method and, consequently, the expenditure on developing the method (R44 000) will be split
over the periods during which income is expected to be earned.
Expected income from Development
20.1 R20 000
20.2 R350 000
20.3 R230 000
Total R600 000
Amount spent or Research to be written off each year. This year = R21 200
Amount spent on Development to be matched to expected benefit. This year = R44 000
Research write off = 20 000/600 000 x R44 000 = R1 467
Deferred write off = R44 000 – R1 467 = R42 533

i) Points that should be considered, which will affect the usefulness of the financial statements:
 inflation (use of historic costs)
 estimates
 judgements
 first year of operating makes comparisons difficult.
j)
 Depreciation - estimating the useful lives of assets.
 Research and development - estimating future income which will arise from the new
technique.
 Accrued expenses - estimating the amount of expenses incurred at year-end.
 Non Current assets - estimating their residual value (if any).
 Taxation - although the accountant has established the tax liability precisely, this is unusual
because in practice, this is normally an estimated amount. The final assessment by the
Receiver of Revenue is normally made a considerable time after the year-end.
k)
Net income represents the amount which has been earned by the company over the financial
period. This is used to measure the performance of the company. The net income after tax is the
amount that the directors have available to distribute to shareholders. Net income thus
represents the return by the company on its activities.
Dividends represent the return to the shareholders on their investment. The amount of dividends
distributed may be the same as net income, but this is unlikely. Normally, a portion of the
company's earnings is retained for future growth of the company.
l)
Book value of a share = Net asset value / Number of shares
= 167 759 / 220 000
= 76c per share
The market value of the share will depend on the perception by the public of the future of the
company. Depending on this perception, the market value may differ from the book value.

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CHAPTER 5 SUGGESTED SOLUTIONS

SOLUTION TO MULTIPLE CHOICE QUESTIONS

5.1 (a) 5.6 (d) 5.11 (b)

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 1

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 2

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 3

 Preference shares (par value or no par value)

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 4

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 5

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 6

a) Original Plant and Machinery

Additional plant and machinery:

New plant manufactured:

R11 000 + R6 125 + R2208 R19 333

Balance sheet at 30 June 20.1

Note to the balance sheet

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 7

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 8

d) Balance sheet at 30 June 20.1

Land and Buildings 390,000 25,000 365,000

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b) 31 Profit and loss 960

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Ordinary share capital

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Post adjustment trial balance at 28 February 20.1

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Income statement for the year ended 28

Balance sheet at 28 February 20.1

NOTE 1 Cost Accumulated Book

e) Return on equity = 37 310/100000 = 37,3%

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Trial balance of Rolling Lawns (Pty) Ltd at 30

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Income statement of Rolling Lawns

Balance sheet at 30 April 20.1

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BALANCE SHEET OF GALACTIC ON 31 MARCH

INCOME STATEMENT OF GALACTIC FOR THE

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Post Adjustment Trial Balance of Cotton Knitters Ltd at 31

INCOME STATEMENT OF COTTON

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Income statement of Unisex Stylists Limited

Balance sheet of Unisex Stylists Limited at 31

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Accumulated depreciation on office equipment

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Taurus Finanical Brokers Limited

28 Fee revenue 527,270

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Taurus Financial Brokers Limited

© FLYNN D K: UNDERSTANDING FINANCE AND ACOUNTING: 2ND EDITION: SUGGESTED SOLUTIONS 30